Jersey: Facilitation Of Tax Evasion: A New Corporate Offence

HM Revenue & Customs (HMRC) has recently
published a number of Consultation Papers, including a proposal to
introduce a new corporate criminal offence of failing to
prevent the facilitation of tax evasion.

This strict liability offence will seek to extend criminality to
corporations where they fail reasonably to prevent their
representatives (for example, employees) from facilitating criminal
tax evasion during the course of a business (the Proposed
Offence). It aims to make it easier for corporations to be
found liable for the acts of their representatives, removing some
of the previous hurdles that have historically made such liability
difficult to prove (for example, showing the requisite level of
intent).

Crucially, and as explained below, it seeks to have
extra-territorial effect along the same lines as the Bribery Act
2010, meaning that it is potentially of great importance to
offshore financial services businesses.

HMRC has received responses on the Consultation Papers from
industry, and, in December, provided its own reply together with a
draft of the legislation. The areas of interest arising out of this
reply are as follows, and each is covered in more detail below:

what reasonable procedures will
corporations be expected to have in place to guard against the
Proposed Offence?

what constitutes a
"corporation" under the Proposed Offence?

whose behaviour will a corporation be
liable for?

is a prior criminal conviction of the
UK tax payer and/or an employee or other representative of the
corporation a necessary pre-requisite to a conviction of the
corporation?

what is the geographical scope of the
Proposed Offence?

does the Proposed Offence have
retrospective effect and is there a de minimis
threshold?

Reasonable procedures? It is a defence to the
Proposed Offence for the corporation to show that
"reasonable procedures" were in place to prevent
the facilitation of tax evasion. However, it is unclear whether
this will in practice necessitate the implementation of additional
procedures for checking the activities of employees/representatives
beyond what is already required.

For example, organisations will already have in place procedures
for awareness and reporting of suspicious activities. It is unclear
whether this will be sufficient.

Formal guidance will be provided by HMRC as to what constitutes
"reasonable procedures". This is a requirement
under the new draft legislation. The next stage of the consultation
process will include consideration of the content of such formal
guidance.

What is a "corporation"? The UK
Government has confirmed that "corporation"
should be read "as including all legal persons".
This includes companies and partnerships "regardless of
whether they operate commercially or for other reasons (such as
charity)".

This is a wide definition. However, the UK Government has
confirmed that "the procedures that are considered
reasonable will be proportionate to the risk faced by the
corporation". Thus, what comprises "reasonable
procedures" may differ between, for example, commercial
entities and charitable ones.

Whose behaviour is caught? The UK Government
has stated that corporations "should be liable for all
those who provide services on their behalf". This
includes all those over whom the corporation has some control, for
example employees, and the situation where "someone not
ordinarily employed by the entity" provides
"services to its customers on its behalf".

It is unclear whether it could apply to a trust company for: (i)
the actions of directors of companies that are subsidiary to a
trust of which it is trustee; or (ii) the actions of third parties,
for example, investment advisers, to whom the trust company's
responsibilities (in relation to that particular trust) are
delegated.

Consideration of the reasonableness of procedures will take into
account the level of control that an entity is able to exert over
those acting on its behalf. For example, if Corporation A provides
services on behalf of Corporation B to the clients of Corporation
B, reasonable procedures might include an assessment of Corporation
A itself. However, Corporation B has limited control over the
actual employees of Corporation A, and therefore may not be
expected to be able to monitor them.

Only acts carried out by an employee in that capacity will be
caught by the new offence. Acts undertaken by an employee in their
personal/private capacity will not be covered, unless it can be
shown that the culture of the corporation was generally encouraging
of tax evasion.

Prior conviction of UK tax payer and
employee/representative? The UK Government has confirmed
that prior "non-compliance by the [UK] tax payer
should meet the standards of criminal conduct" before the
Proposed Offence can take hold as against the corporation. In other
words, there should be a predicate offence by the UK tax payer
under either:

existing laws, for example the common
law offence of cheating the public revenue or section 106A of the
Taxes Management Act 1970 (fraudulent evasion of
income tax); or

the new offence of "offshore
tax evasion" to be introduced as part of the
Finance Act 2016. This will create a strict
liability criminal offence for UK tax payers relating to tax
payable on overseas income and gains not reportable under common
reporting standards (although this will have a de minimis
threshold of £25,000 tax evaded and apply only to income and
gains from the tax year in which the legislation is introduced i.e.
it will not have retrospective effect).

However, there does not necessarily have to be an actual formal
conviction of the UK tax payer. There may be circumstances where
the basis of the evasion is sufficient to warrant proceeding
without such a conviction (e.g. where there has clearly been
evasion, but a decision has been taken that it is not in the public
interest to prosecute the UK tax payer). In such a case, the
prosecution of the Proposed Offence would, as a pre-requisite,
"have to prove to the criminal standard during the
prosecution of the corporate that the predicate offence had been
committed [by the UK tax payer]".

Likewise, a formal conviction of the employee or other
representative of the corporation for aiding, abetting,
counselling, procuring, encouraging, assisting in or be knowingly
involved in the offence by the UK tax payer is not strictly
necessary. If, for example, the representative is a whistle-blower,
or there is some other public interest reason that precludes
prosecution, then the Proposed Offence can still bite. However,
again, the UK Government has confirmed that it will be
"necessary to prove (beyond reasonable doubt) that the
representative had criminally facilitated the tax payer's tax
crime" before the corporation can be convicted.

Thus, if either or both of the UK tax payer or the
employee/representative has not been formally prosecuted and
convicted, the prosecution will need to demonstrate that such a
conviction would have been forthcoming had such steps been
taken.

This appears to be burdensome on the prosecution, involving a
number of potential prior hurdles to be overcome. It also
potentially impacts on the UK tax payer or employee/representative,
reaching conclusions on the criminality of their actions but
without a proper trial. It may discourage both UK tax payers and
employees/representatives from making voluntary disclosures if
there is the possibility that the potential benefits in doing so
(for example, a decision not to prosecute them for a criminal
offence) may be rendered nugatory in a later prosecution of the
corporation by publicly inferring criminality on their part.

Liability of the corporation is strict, in the sense that the
prosecution does not need to prove intent to facilitate
offshore tax evasion. The UK Government does, however, acknowledge
that "it is not reasonable to expect corporations to be
able to uncover all criminal acts conducted by its representatives,
especially where the representative has taken steps to hide their
criminal conduct from the corporation". This will,
however, go to the reasonableness of the procedures operated by the
corporation i.e. was the behaviour so obscured that it was
incapable of detection by reasonable procedures.

Geographical scope of the Proposed Offence? The
Proposed Offence will operate against corporations who are:

incorporated or formed under any part
of UK law; or

are incorporated anywhere else (or is
of a similar character to a UK entity, e.g. a foreign partnership),
and carries on all or part of its business in the UK.

Thus, if the business of the corporation touches the UK then it
will be caught. It is immaterial for these purposes whether the
Proposed Offence takes place in the UK or elsewhere. It is the
nexus with the UK that is all-important and provides
jurisdiction.

The Proposed Offence covers the facilitation of a UK tax loss by
both UK and non-UK corporations (where the latter's business
touches the UK). However, it also covers the facilitation of a tax
loss overseas by a representative of a UK
corporation. The UK Government has confirmed that "...the
preference will always be for the jurisdiction suffering the tax
loss to take the criminal or civil response it feels most
appropriate". However, if: (i) that overseas jurisdiction
is prevented from taking action; (ii) the entity involved is a UK
corporation; and (iii) there is public interest in doing so, the UK
should be empowered to take action itself.

Does the Proposed Offence have retrospective effect and
is there a de minimis threshold? The Proposed
Offence will not have retrospective effect if the predicate offence
by the UK tax payer is the new offshore tax evasion offence
(because, as indicated above, this does not have retrospective
effect itself). Likewise, where it is based on this new offence, it
will indirectly have a de minimis threshold of
£25,000.

However, where it is based on existing tax evasion offences
under UK law it is unclear whether it will have retrospective
effect. Further, there is no indication of a general de
minimis threshold in this regard.

Comment

Whilst this reply by the UK Government is helpful in further
understanding the nature of the Proposed Offence, the next stage of
the consultation process is arguably even more crucial. It will be
this phase that shapes what "reasonable
procedures" a corporation will be expected to have in
place as a defence against the Proposed Offence. Whether this
increases the regulatory burden on offshore regulated providers of
financial services business remains to be see.

In addition to the criminal offence, a new civil offence of
"enabling offshore tax evasion" is proposed as
part of the Finance Act 2016. This will arise
where:

a person (this could be an individual
or corporation) has knowingly enabled a UK tax
payer to carry out a tax evasion offence (for which they have been
prosecuted) or where the UK tax payer has been found liable to UK
tax penalties; and

the conduct in question has involved
"offshore activity" (which is widely
defined).

Enabling might include the provision of trust or corporate
services.

The potential civil penalty on someone who has enabled the tax
evasion is 100 per cent of the potential lost revenue (although
this may be mitigated if there has been, for example, voluntary
disclosure).

The UK Government "recognises the difficulties in
applying civil sanctions to those enablers who operate
overseas" and indicates that it "will continue
to work with international partners to find solutions to this
problem". Whether this involves the further development
in Jersey and elsewhere of mutual assistance in foreign tax matters
remains to be seen. If, however, the enabler operates in the UK
then this is unlikely to present an issue, and it may operate in
tandem with, or as an alternative to, the Proposed Offence.

The civil offence also provides for the public "naming
and shaming" of those who have been found liable. In the
event that an overseas-based regulated enabler is held to be liable
in absentia, and is named and shamed, it may cause
reputational damage or, worse, prompt its own regulator to take
enforcement action.

The risks to offshore regulated businesses associated with the
new proposed civil offence are, therefore, far from negligible.
Those providing trust and corporate services should be certain that
settlors and beneficial owners are not using their services to
evade tax.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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